Breakage issues with your mortgage? A well-stocked toolbox of online calculators can help.
With borrowing costs set to rise in the months ahead (see my Facebook page for comments: Rob Carrick - Personal Finance), homeowners have a dwindling amount of time left to investigate the possibility of breaking their mortgage to take advantage of today's low rates. The challenge is finding out, first, how much it will cost and, second, whether it's worthwhile to proceed.
This is where the calculators come in. They're online, they're free and they're useful to people who are both shopping for a mortgage and who already have one.
Your lender has the information you need to decide whether it's worthwhile to break your mortgage, but it's always smart to learn what you can on your own. It's not unknown for banks to exploit the uninformed and credulous.
The best way to find out the cost of breaking your mortgage is to use a calculator like the one offered on the website of the Canadian Mortgage Trends blog. It's explained here that your lender will require that you pay the greater of three months' interest on your mortgage, or an amount called the interest rate differential (IRD). That's the difference between what you would have paid in interest and what the lender can make at current rates for the remainder of your mortgage term.
Is this a good time to lock in or refinance your mortgage?
Four pieces of information are needed to use this calculator: the current balance on your mortgage, your original rate, the rate you can get now and the remaining number of months in your mortgage term. If you have online banking, you should easily be able to get this information (I found mine in about five seconds).
Play around with this calculator and you'll realize that, in addition to the gap between your existing rate and the new rate you'd like to get, the key variables in determining the compensation you'll have to pay your lender are the length of time left on your mortgage and your mortgage balance. The longer you have to go, the more likely it is that you'll have to pay the pricier IRD.
It's important to note that we're dealing in ballpark amounts here, not exact numbers. Still, you'll have enough information to proceed to Step Two of the should-I-break-my-mortgage analysis, which is to decide whether paying the compensation amount is worthwhile.
More on mortgages
For that, try the mortgage savings calculator created by the Office of Consumer Affairs at Industry Canada with help from Moshe Milevsky, a professor at York University's Schulich School of Business, and some researchers.
Here, you'll plug in the details of your current mortgage, including the dollar amount needed to break it, as well as the particulars for your new mortgage. The calculator will then tell you how much you'll save or lose by breaking your mortgage.
Several mortgage brokerage firms offer their own calculators to help you see whether it's economical to break your mortgage, and they're worth looking at to develop a consensus view of where you stand.
If you're renewing a mortgage when your term is up or shopping for a new mortgage, you may find you're trying to compare rates from two different lenders. Sure, a lower rate is better. But by how much?
For answers, try the differential calculator on the CanadaMortgage.com website (not to be confused with CanadaMortgage.ca, the site of Canada Mortgage and Housing Corp.). It will show you exactly how much worse off you'll be with the higher of two rates.
People shopping for a first home need a special set of tools, starting with an affordability calculator from Canada Mortgage and Housing Corp. that lets you determine the maximum mortgage, house price and monthly payments you can afford (you know it's foolish to go right up to the maximum, right?)
Another way to attack the affordability question is to use a CanadaMortgage.com calculator where you start by inputting the price of a house you're looking at, your down payment and mortgage particulars. You'll then find out how much household income you'll need to afford the home.
Most first-time buyers are getting into the market with down payments below 20 per cent, which means they'll require mortgage insurance. Among the many mortgage calculators on the Canada Mortgage Information website is one that will tell your how much your mortgage insurance premiums will be. Just type in the amount of your loan and match the premium to the percentage down payment you're planning to make.
We turn again to the CanadaMortgage.com website for one last calculator. It's designed to compare the benefits of buying versus renting, an analysis people often prejudge in favour of buying.
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Your online mortgage toolbox
Calculators of interest
An indication of how much it will cost to break your mortgage
To see if it's worthwhile to break your mortgage
To know how much you can afford
To quickly compare two different mortgage rates to see the actual benefit of a lower rate
To see how you would benefit if you increased your mortgage payments